CGS-CIMB Research has not included the valuation of AirAsia Group Bhd’s digital businesses into its target price as it considers such businesses to be still in their early stages of development.
Moreover, the businesses may consume significant amounts of cash resources due to the presence of established and well-funded competitors, according to the research house.
“We have also done some scenario analysis, factoring in various assumed values for the ‘airasia digital’ businesses,” justified analyst Raymond Yap in an aviation sector outlook.
“Our RNAV (revised net asset value) for AirAsia will rise to 61 sen assuming RM2 bil value for the digital businesses or RM1 assuming RM4 bil value or RM1.38 assuming RM6 bil value.”
More broadly, however, CGS-CIMB Research maintained its “reduce” call on AirAsia with a target price of 23 sen – one of the lowest valuation among the local research houses.
“Our target price factors in AAGB’s proposed rights issue of RM974.5 mil of redeemable convertible unsecured Islamic debt securities (RCUIDS) at a conversion price of 75 sen,” the research house pointed out.
“Although the RCUIDS are treated as debt on the balance sheet of AirAsia for the purposes of our target price computation, we have treated the RM974.5 mil RCUIDS as equity and also factored-in an enlarged share base on the assumption that the RCUIDS will be fully converted into new ordinary shares.
“We have made the assumption of full equity conversion because the RCUIDS conversion price of 75 sen is lower than AAGB’s current share price.”
For the purposes of its RNAV calculation, CGS-CIMB Research has assumed that AirAsia’s aircraft lease liabilities are discounted by RM3.6 bil due mainly to a potential waiver of outstanding unpaid lease liabilities up to Dec 31, 2021F.
Up to end-June, AirAsia had RM2.4 bil in unpaid lease liabilities which is circa 90% of its total lease instalments since April 1. But this amount is expected to increase to RM3.6 bil by Dec 31, 2021F.
“AirAsia is currently negotiating with its aircraft lessors for this waiver. In addition, it is negotiating for a cut in the monthly aircraft lease rates although this is partially compensated by a 3/6-year extension of the leases,” CGS-CIMB Research pointed out.
“We have not included the potential waiver of outstanding unpaid lease liabilities into our financial model but have factored it into our RNAV calculation for the purposes of deriving our target price.”
For now, CGS-CIIMB Research’s upside risks for AirAsia include a potential resumption of domestic air travel in Malaysia if the Government allows interstate travel again since disallowing it from Jan 13.
“The Langkawi travel bubble from Sept 16 is part of this gradual resumption of domestic travel,” suggested the research house.
“Another upside risk is if AirAsia secures a higher-than-expected lease-rate discount as a result of its ongoing efforts to re-negotiate its operating lease liabilities with its aircraft lessors.”
CGS-CIMB Research added that its valuation of AirAsia factors in our assumption that the later’s aircraft lease liabilities as of Dec 31, 2021F will be waived by RM3.6 bil. – Sept 17, 2021